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BRUSSELS, Belgium, Jan. 8 (UPI) — The European Commission on Wednesday ordered Germany to slash its ballooning budget deficit or face the prospect of multi-billion-dollar fines in an attempt to bolster the EU's sluggish growth rate and shore up confidence in the rules underpinning the euro.

Under the bloc's "growth and stability pact," eurozone members are legally bound to keep public debt less than 3 percent of gross domestic product and to keep government debt to below 60 percent of GDP.

States that fail to do so can be fined up to 1 percent of their GDP, though few analysts expect the European Union to plump for that option.

The EC also predicted that government debt would breach the stability pact ceilings by a small margin.

The EU's economist in chief, Commissioner Pedro Solbes, told reporters the deficit registered by Europe's largest economy in 2002 "did not result from an unusual event outside the control of Germany, nor did it result from a severe economic downturn."

Instead, the former Spanish minister pointed the finger of blame at Germany's "very low growth potential," which he said resulted from over-rigid labor markets and burdensome regulations.

Chancellor Gerhard Schroeder has promised to reduce his country's government deficit to 2 3/4 of GDP by the end of 2003. However, this is based on growth rate of 1.5 percent — a figure the commission believes is a full percentage point above forecast rates.

The commission's criticism is likely to be viewed as a severe embarrassment for Berlin, which insisted on strict rules to make Eurozone states balance their books when the growth and stability pact was drawn up in the late 1990s.

The reprimand, which is expected to be backed by European Union finance ministers later this month, also comes at a testing time for Schroeder, who is facing the likelihood of a winter of public sector strikes.

Germany was not the only country to be rapped over the knuckles by the Brussels-based EU executive Wednesday.

The French government, which was warned in November, was told it hovered close to the 3 percent ceiling in 2002 and was in danger of breaching the limit in 2003 unless it cut expenditure.

Italy was also instructed to take steps to reduce its growing budget deficit and cut government debt, which reached a 110 percent of GDP in 2002.

Solbes' tough message was aimed at strengthening the stability pact, which commission President Romano Prodi described as "stupid" in a newspaper interview last year.